An Economic Perspective on Software An Economic Perspective on Software Licenses Licenses

– – Incentives in Open Source SoftwareIncentives in Open Source Software

Kasper Edwards

Department of Manufacturing Engineering and Management

Technical University of Denmark

Outline

Point of Departure

Properties of Software

Three Licenses

Two Types of Agents

Roles and Desired Use-Products

A Model

Point of Departure

Motivation Why is open source software being developed?

Raymond Geeks bearing gifts

Ego, social status and reputation

Lerner & Tirole Leadership

Reputation effects and spillover

Problems Explained incentives for individuals - not mechanisms and

dynamics

Too much emphasis on social status

Point of Departure

Interest The development process

Economics

There is special dynamic within the development process

Hypothesis Properties of software + Type of agent => A certain behaviour

(incentives and mechanisms)

Goal To develop a model of software development and consumption

Properties of Software

Two properties Technical properties

License properties

Technical Properties Software can be reproduced without loss of quality

The cost of copying is non-prohibitive

The cost distribution is non-prohibitive

License Properties The license set boundaries for possible behaviour

Focus on the economic issues rather than the political

Three Licenses

Three extremes Microsoft EULA

GNU GPL

BSD

Microsoft End User License Agreement The licensee may use in the intended way

The licensee may sell the program once

The license may NOT copy, distribute, modify, use on more than one computer etc. etc.

It the program eats your data the program may be refunded

- - - A capitalists dream come true

Three Licenses

GNU General Public License (GPL) The Licensee may copy, distribute and modify

Source code for modifications distributed must be available

Distributed copies carry same license

The viral effect…

- - - Protect the users

BSD License The Licensee may copy, distribute

and modify

Modifications and derived works may be distributed as closed source

- - - The liberal alternative

Two Types of Agents

Firms Command resources

Pay salaries

Profit maximizing

Individuals Only command personal time

Also driven by leisure

Utility maximizing

Roles and Desired Use-Products

Two Roles Developers

User-developers

Use-Products An agent’s particular use of a combination of features in a

program

A Model – Microsoft EULA License

Program is developed

User-developer

MaintainerDistribute

Private use

Agents whouse U-U assistance

Dynamics – Microsoft EULA License

Basic market situation Profit incentive for developing

Main dynamic is outside the model

Competition between maintainers

User-maintainer Feedback if desired use-product is not present

User-to-user assistance Cost effective way of obtaining information

Infoproviders derive a personal benefit i.e. reputation effect

A Model – GPL License

Program is developed

User-developer

MaintainerDistribute

Private use

Agents whouse U-U assistance

Modify theprogram

Keepmodifications

Distributemodifications

Agents whomodify

Discuss

modifications

Dynamics – GPL License

Why GPL? Personal beliefs

Evolutionary perspective: In beginning profit prospects are low

Why Make modifications? Desired use-product missing

Maintenance costs Maintaining a separate patch is costly

Lack of information User-developers cannot know if other user-developer are creating

a similar use-product

The cost of being too late No reputation effect

Maintenance costs

A Model – BSD License

Program is developed

User-developer

MaintainerDistribute

Private use

Agents whouse U-U assistance

Modify theprogram

Keepmodifications

Distributemodifications

Agents whomodify

Discuss

modifications

Closed sourcedistribution

A Model – BSD License

M ain tain er

P r o gr a m isde v e lo p e d

U se r - dev e lo p e r

M o d if y

P r iv a teu s e Keep

D is tr ib u te

A ge n t swh o use

c lo s eds o u r c e

A g en tsw h o

m o d i fy

N E WM ain t ain

er

P r o g r am isd ev e lo p ed

Us er - d ev elo p er

D is tr ib u te

A gen t sw h o u s e

U -U a ssis tan c e

P r iv a te u s e

Dynamics – BSD License

Identical to GPL

But Firms have a greater incentive to adopt BSD

Greater chance that modifications are kept private

Free riding becomes a significant problem

Effect limited at this level of focus Standards and compatibility issues are missing

Conclusion

A model based in economics Seems to offer a reasonable explanation for the phenomenon

The license shapes possible behaviour The three licenses exemplify different types of behavior

Licenses not only restrict behavior but also create incentives

Limitations Project as object of analysis

Consequences from standards and compatibility not included

Obvious implications for policy P-makers must consider which license is best for the economy

The End

Incentives and Costs

Incentives for individuals Ego – “LOOK What I have created!”

Peer reputation

Signaling effects – may spill into the real world

A desired use-product can be obtained at little cost

Incentives for firms A desired use-product can be obtained at little cost

Homemade modifications

Possible to create services without maintaining the software

Costs Time (adoption, programming, integration, etc.)

Firms: Wages

Individuals: Opportunity cost

Dynamics

Uncertainty Difficult to predict development path => Lowered free riding

The “Keep Private” Penalty Keep private => High maintenance costs

Always a work in progress Low initial commercial value => license lock-in (GPL)

The cost of being too late Development becomes a sunk cost

Risk of the “Keep Private” penalty

Aggregated benefit One agents small contribution result in large aggregated benefits

Does the Model Hold Up?

Henrik Individual, limited spare time

High opportunity cost

The modification was a one time investment

Paul Consultant, working for a firm

Obvious incentive for keeping private

Small firm, Paul charged extra for keeping private

No in-house programmers – no wish for extra maintenance

Number 1 to market the new product more important

BSD License

GPL License

MS EULA

The Model

Program is developed

User-developer

MaintainerDistribute

Private use

Agents whouse U-U assistance

Modify theprogram

Keepmodifications

Distributemodifications

Agents whomodify

Discuss

modifications

Closed sourcedistribution

Two examples of OSS development

Henrik – Need feature Programmer and Linux enthusiast

Interested in kernel development

Had to use windows for work

Linux was unable to read Windows’ file system

Gordon had a patch, which he maintained The patch was troublesome to obtain In frustration Henrik decides to fix the patch for integration

The patch is integrated and future versions of Linux can now read Windows’ file system

Two examples of OSS development

Poul – Paid modifications FreeBSD core developer, consulent

Small American ISP wanted to market a new product

The product: Individual hosting

Each customer was to obtain full control

The ISP already used FreeBSD, however functionality was needed

Poul was hired for the job

To prices: 1) Private 2) Open source

Added benefit: General increase in FreeBSD security